Monday, June 1, 2009

Why Buy & Hold Works?

Trust me - it works!
Because it is a zero sum game. When you buy, someone has to sell or vise versa. So one wins and the other loses. But what happens at the overall level. The market is a zero sum game. If businesses that participate in that market are making money and growing - the overall market value will appreciate otherwise it may decline. The way I look at this situation is either at the macro or the micro level. At the macro level you buy the market - US, developed, emerging, small cap ... and at the micro level you participate in an individual business by buying individual company stock. In both cases your research and confidence is paramount to making this model work. Why you pick a market or a stock, what is your time horizon, what are the growth prospects, what are the risk factors, what is your diversification strategy are some of the questions worth pondering.

Bottomline - in most cases stay away from trying to time the market or stock - either yourself of thru middlemen. Middlemen in my mind are the players who buy and sell for you to capture that elusive 'home run'. What you end up doing is shaving off potential benefits in the form of commissions, fees and bad timing. Here is an excerpt from a recent interview John Bogle did and explained why "buy & hold" still works.
"I read all the time that investors need to move beyond a buy-and-hold strategy,
but this strikes me as being a dumb idea. What is the advantage of swapping
stock with other people? The stock market system is based on the idea of pitting
the interests of one investor against another, knowing that only one will win.
People say it's a stock-pickers market but, if your stock picker is good, then
mine is bad. It's all a gimmick. Of course buy and hold is the thing to do. A
genius like Jim Cramer hasn't gone anywhere for 10-14 years and few [managed]
mutual funds have beaten the market indices during the same period. It's just
market timing, and your good market timing is my bad market timing. [We invest
within] a totally illogical system where we move money around and the
middlemen--or what Warren Buffet calls the "helpers"--are the only ones getting

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